Mood in foreign exchange trading: Cognitive processes and performance

Abstract This paper examines the effects of mood on the behavior of traders or decision makers in financial markets. Based on a review of the psychological theories and empirical findings which relate mood to decision making and information processing, we derive hypotheses with respect to the impact of good, neutral, and bad moods on the behavior of traders. Two experiments ( N =66 and 72) were conducted on an Internet platform which simulated foreign exchange trading based on historical market data. The first experiment manipulated mood using feedback and music whereas the second one asked subjects to read mood-laden statements. It was found that traders in a good mood had an inferior trading performance (losing money) compared to those in a neutral or bad mood (making profit). This is because traders in a good mood made less accurate decisions than those in neutral or bad moods. Those in a bad mood were the most accurate in their decisions but behaved conservatively in their trading. Subjects in a good mood tended to make less accurate decisions though they spent on average at least the same time as the other subjects on information processing and decision-making. They also were over-confident taking unwarranted risks. The studies concluded with insights concerning the effects of mood on choice of trading strategies.

[1]  Magda B. Arnold,et al.  The nature of emotion , 1968 .

[2]  L. Abramson,et al.  Judgment of contingency in depressed and nondepressed students: sadder but wiser? , 1979, Journal of experimental psychology. General.

[3]  R. C. Sinclair,et al.  Mood, categorization breadth, and performance appraisal: The effects of order of information acquisition and affective state on halo, accuracy, information retrieval, and evaluations , 1988 .

[4]  Marilyn E. Gist,et al.  Responses to Successful and Unsuccessful Performance: The Moderating Effect of Self-Efficacy on the Relationship between Performance and Attributions , 1995 .

[5]  J. Payne.  Psychology of Risky Decisions , 1985 .

[6]  A. Isen,et al.  Some Specific Effects of Four Affect-Induction Procedures , 1983 .

[7]  S. West,et al.  Multiple Regression: Testing and Interpreting Interactions. , 1994 .

[8]  Nico H. Frijda,et al.  Varieties of affect: Emotions and episodes, moods, and sentiments. , 1994 .

[9]  L. Abramson,et al.  Depressive realism: Four theoretical perspectives. , 1988 .

[10]  Melvin M. Mark,et al.  The influence of mood state on judgment and action: Effects on persuasion, categorization, social justice, person perception, and judgmental accuracy , 1992 .

[11]  Shelley E. Taylor,et al.  Illusion and well-being: a social psychological perspective on mental health. , 1988, Psychological bulletin.

[12]  Z. Kunda,et al.  The case for motivated reasoning. , 1990, Psychological bulletin.

[13]  Joseph P. Forgas,et al.  Mood effects on decision making strategies , 1989 .

[14]  G. Clore,et al.  Mood, misattribution, and judgments of well-being: Informative and directive functions of affective states. , 1983 .

[15]  Rob B. Briner,et al.  Changing Moods: The Psychology of Mood and Mood Regulation , 1996 .

[16]  Michel Tuan Pham,et al.  When Arousal Influences Ad Evaluation and Valence Does Not (and Vice Versa) , 2001 .

[17]  A. Isen,et al.  The Influence of Positive Affect on Clinical Problem solving , 1991, Medical decision making : an international journal of the Society for Medical Decision Making.

[18]  Shawn P. Curley,et al.  Individual differences in risk taking. , 1992 .

[19]  Leon Mann,et al.  Stress, affect, and risk taking. , 1992 .

[20]  Robert G. Hagstrom,et al.  The Warren Buffett Way: Investment Strategies of the World's Greatest Investor , 1994 .

[21]  E. Velten.  A laboratory task for induction of mood states. , 1968, Behaviour research and therapy.

[22]  Janet Metcalfe,et al.  Mood Dependent Memory for Internal Versus External Events , 1989 .

[23]  Joseph P. Forgas,et al.  Affective Influences on Judgments and Behavior in Organizations: An Information Processing Perspective , 2001 .

[24]  R. C. Sinclair,et al.  Toward a Multiple-Method View of Mood Induction: The Appropriateness of a Modified Velten Mood Induction Technique and the Problems of Procedures With Group Assignment to Conditions , 1994 .

[25]  Diane M. Mackie,et al.  Cognitive Mediation of Positive Affect in Persuasion , 1987 .

[26]  G. Clore,et al.  Affect and Information Processing , 1999 .

[27]  D. Cervone,et al.  Mood, Self-Efficacy, and Performance Standards: Lower Moods Induce Higher Standards for Performance , 1994 .

[28]  Harish Sujan,et al.  The influence of mood on categorization: A cognitive flexibility interpretation. , 1990 .

[29]  A. Isen,et al.  The influence of affect on categorization. , 1984 .

[30]  A. Bandura.  Recycling misconceptions of perceived self-efficacy , 1984, Cognitive Therapy and Research.

[31]  G. A. Mendelsohn,et al.  Affect grid : A single-item scale of pleasure and arousal , 1989 .

[32]  Edward M. Saunders.  Stock Prices and Wall Street Weather , 1993 .

[33]  Barbara Means,et al.  The influence of positive affect on decision-making strategy. , 1983 .

[34]  R. Thaler.  Advances in behavioral finance , 1995 .

[35]  Diane M. Mackie,et al.  Affect, cognition, and stereotyping: Interactive processes in group perception. , 1993 .

[36]  G. Bower.  Mood and memory. , 1981, The American psychologist.

[37]  Robert A. Baron,et al.  A Whiff of Reality: Empirical Evidence Concerning the Effects of Pleasant Fragrances on Work‐Related Behavior1 , 1994 .

[38]  J. W. Atkinson.  Motivational determinants of risk-taking behavior. , 1957, Psychological review.

[39]  Leila T. Worth,et al.  Processing deficits and the mediation of positive affect in persuasion. , 1989, Journal of personality and social psychology.

[40]  H. Weiss,et al.  Affective Events Theory: A theoretical discussion of the structure, causes and consequences of affective experiences at work. , 1996 .

[41]  A. Isen,et al.  Positive affect, cognitive processes, and social behavior. , 1987 .

[42]  Jack D. Schwager.  The New Market Wizards: Conversations with America's Top Traders , 1992 .

[43]  A. Isen,et al.  The influence of positive affect on acceptable level of risk: The person with a large canoe has a large worry , 1987 .